SMALL BUSINESS; Uncle Sam Wants You (to Apply for a Grant)

By ELIZABETH OLSON

Published: November 4, 2004

As just about every entrepreneur with a bright idea knows, it can be a long and painful journey from the time the light bulb goes on to the day the revenue starts rolling in.

And perhaps the most frustrating experience of building a start-up is the never-ending quest for financing. A business owner who hits up family, friends, wealthy investors, banks or venture capitalists is likely to discover that they open their wallets reluctantly and become impatient for results once they do hand over the cash.

But for high-technology entrepreneurs, there is another source of financing that can be as generous as it is little known: grants from the federal government's Small Business Innovative Research Program.

The biggest fund, by far, is run by the Defense Department, which parcels out some $1 billion a year to independent companies with fewer than 500 employees. The goal is to stimulate research into novel technologies that can benefit military operations, but with a twist. The department is not paying for exclusivity for the ideas it finances; rather, it wants those ideas to go commercial as quickly as possible to assure a stream of reliable and cost-effective suppliers.

Martin Klein is one of its emerging success stories -- at least that is what he hopes. A chemical engineer by training, Mr. Klein has spent 40 years in the battery and fuel-cell business. In 1970, he founded the Energy Research Corporation, since renamed Fuel Cell Energy Inc., and later sold his stake in it. Today, it employs 500 people.

Then, in 1992, he founded Electro Energy Inc. to develop batteries for the military, and that same year submitted a proposal for a grant for research into what he calls a rechargeable bipolar nickel-metal-hydride battery. What sets it apart from traditional batteries, Mr. Klein says, is its design, which stacks thin flat wafer cells atop one another to improve the flow of current while taking up less space. His eventual aim, he says, is to produce a battery that is 30 percent smaller and cheaper than conventional batteries yet provides 50 percent more power.

The Defense Department, which is always on the prowl for better batteries, particularly for its communications equipment and aircraft, liked his idea. It awarded him $50,000.

Mr. Klein went to work in the basement of his Brookfield, Conn., home, hiring a part-time technician, putting up four workbenches to create a small laboratory and starting work on creating prototypes. Six months later, he presented his test data to the Defense Department and won $750,000 for a second phase of work. He then moved out of the basement and into an office park and hired two full-time technicians and a secretary.

Mr. Klein, 68, said that small-business innovation funds are ''why we are here today,'' but it is not blind governmental largess that kept him and his firm going. When Congress created the program 20 years ago, it was purposely planned not as a handout, but for directed research that would turn into viable commercial products.

The Defense Department says its main criterion for choosing recipients is their determination to become a commercial business, not just a research house. It also selects companies active in areas where there is an ''actual need,'' it says, notably improvements in aircraft, satellites, military hardware, communications systems and logistical systems.

''It's paramount that we have a feel for where they are going,'' said Dean Hudson, program manager for the Army Research Laboratory, one of the Defense Department agencies that reviews research applications from entrepreneurs. ''We evaluate their commercial market potential from the very beginning.''

A handful of other government agencies have similar programs, including the National Institutes of Health, which has a $574 million annual budget and is the largest small-business innovation program after the Defense Department's. The Environmental Protection Agency, the National Science Foundation and the Departments of Energy, Commerce, Health and Human Services, Education and Agriculture have much smaller programs. Like the Defense Department's programs, they are based on a fixed percentage of their annual outside research budgets and thus the amounts vary year to year. All told, the agencies award about $2 billion annually.

The departments and agencies once sent around ''idea books'' seeking high-tech innovators who could address the biggest needs. Now the information is posted on Web sites. Typically, one in eight bidders wins a Phase 1 contract from the Defense Department, and one in three of those wins the deeper-pocket Phase 2 funding. And entrepreneurs can keep going back for more.

So, what does the Defense Department get out of its investment? It has landed some high-profile products; for example, Savi Technology Inc. of California developed a radio computer tag that could be attached to military cargo containers to track their location and contents.

The SaviTag took $2.5 million, or three awards, of small-business innovation money before it went into production. The military is using it in Bosnia and other locations. Commercially, the tag is being used in the trucking, rail and shipping industries, bringing in some $20 million annually in revenue.